Apple Investors Vent on Dividends, but What's Next?

Apple avoided mentioning a potential dividend at its shareholder meeting on Thursday, but can investors do anything to force the issue?

Chris Ciaccia

NEW YORK (TheStreet) --
Apple(:AAPL) avoided mentioning a potential dividend at its shareholder meeting on Thursday, despite the company's ever-growing cash haul. With nearly $100 billion in cash on its balance sheet, calls for Apple to share some of its wealth with shareholders are reaching fever pitch.

Many commenters and tweeters on TheStreet's blog of Apple 's shareholder meeting were clamoring for a dividend announcement. "There will be some news today IMO about div.......there have been too many comments recently by CEO and CFO to leave it on the back porch," wrote mjohnh.

"Most attractive part of a possible dividend to me is the possibility of the shares being opened up to more funds," added Joe, a sentiment which was echoed elsewhere in the blog. "With a dividend, plenty of funds will now be able to purchase shares of apple," explained a commenter called John. "Will it see 600 before year end?"

There has been plenty of talk that a dividend could spur institutional investment in Apple. In a research note released on Friday JP Morgan noted that Apple's stock remains underowned institutionally. "Of the 282 mutual funds indexed to the Russell 1000, a surprising 40% do not have Apple as a top 10 holding - this
despite the fact that Apple is the largest stock in the Russell 1000," explained JP Morgan analyst Thomas Lee.

There's clearly plenty of appetite for Apple to rethink its cash strategy, as evidenced by a commenter called 'p' on TheStreet's Live Blog, who urged Apple CEO Tim Cook to be more forthcoming on the dividend issue.

In a recent poll conducted by TheStreet, some 70% of respondents said that Apple should start paying a dividend again. The tech bellwether made its last dividend payment in 1995.

However, the dividend brouhaha poses the question: "Do Apple shareholders have a legal right to the cash, and could they sue Apple to get it?"

A famous example of suing a company to pay a dividend occurred almost 100 years ago, when the Dodge brothers sued Ford Motors(:F) to try to extract a dividend.

In 1916, the Dodge brothers sued Henry Ford for keeping his company's cash, nearly $60 million (remember when $60 million was a lot of money?) and not distributing it to shareholders. Ultimately, the Michigan Surpreme Court ruled in favor of the Dodge brothers and forced Ford to declare a dividend.

The major difference, however, between Apple in 2012 and Ford in 1916 is that Ford was a closely held company, says Lynn Stout, visiting professor of corporate law at Cornell Law School.

"Essentially, corporate law reserves the right to say that if the board doesn't want to pay a dividend, the only recourse shareholders have is to replace the board or get them to change their mind," Stout recently told TheStreet. "Dodge v. Ford Motor still applied to closely held companies, but Apple is a public company."

She also explained that the Dodge v. Ford is frequently mis-cited, and is not applicable in this case.

"When you look at Dodge versus Ford, it's not about the company obligation to pay a dividend, it's about the ability of a majority shareholder abusing the minority shareholders," said Nicholas Rogers, associate attorney at Gaskins Bennett Birrell Schupp LLP.

Shareholders continue to press CEO Tim Cook and his team about what Apple's intentions are for its massive cash hoard. Some Investors, however, are split on whether Apple should opt for a special one-off dividend payment or start making regular payments.

Cook has said before he is "not religious" about holding cash, potentially setting the stage for a dividend later this year. During Apple's first-quarter conference call, CFO Peter Oppenheimer said the company was "actively discussing the uses of its cash," but that it had nothing to announce at the time.

Channing Smith, portfolio manager of Capital Advisors Growth Fund said that he wants to see a dividend sometime this year. "When you look at the cash position, obviously we would like to see a healthy mix between a dividend, acquisitions and a buyback, but we wouldn't be surprised to see a dividend initiated sometime this year," Smith said over the phone recently. "Right now, the cash is an asset that's not really working for investors today."

Shareholders of companies such as Google(:GOOG) could argue against paying a dividend, as shares have performed exceedingly well since going public in 2004. The Internet giant has never paid a dividend. Microsoft(:MSFT), however, was pressured by shareholders to pay a dividend in the early 2000's, and did so by paying a special $3 dividend in 2004, in addition to buying back $30 billion worth of stock. The software giant now pays a regular quarterly dividend of 20 cents per share.

Even though there's growing pressure for Apple to start paying a dividend again, the board does not have an obligation to pay, despite investors' cries for something to be done.

"Apple has every right to its cash holdings and to reinvest as the company sees fit," said Dr. Margaret M. Blair, Professor of Law at Vanderbilt University Law School, during a recent phone interview. "If the board was doing a terrible job of reinvesting its cash, that might be a different story, but it looks like they are doing a great job of it."

Corporations are not charities, say lawyers, and are designed to earn a profit, which they can't do effectively if shareholders are demanding financial capital back. "Otherwise, corporations would have problems," Stout noted.

At the end of the first quarter of 2012, Apple had $97.6 billion in cash and cash-equivalents on its balance sheet. The tech giant has presumably passed the $100 billion mark by now, assuming the company is generating over $3 billion in free cash flow per month. (Apple had cash flow from operations of $17.5 billion in its most recent quarter).

Cook recently acknowledged that Apple has more cash than it needs, but he asked that shareholders be patient with the decision making process.

This could signal a dividend is coming sooner rather than later, but like all things Apple, it will come when they are good and ready. And not a moment too soon for many investors.